Asset Allocation and Portfolio Diversification Flashcards
(32 cards)
The purpose of ___________________ is to choose an appropriate asset allocation
based on forecasts of the economy, expectations of selected asset classes, and the client’s risk tolerance.
strategic asset allocation
__________________ refers to changing the mix of investment classes based on changing market conditions. Often referred to as market timing
Tactical asset allocation
Tactical asset allocation may generate ___________________________ from constantly changing the mix between asset classes
high transaction and turnover costs (e.g., taxes and commissions)
An investment strategy investing in both broad market indexes and higher-risk alternatives
core and satellite
Portfolios MAY/MAY NOT exist above the efficient frontier
May Not
b/c the efficient frontier consist of the most efficient portfolios, anything above the line is unattainable
The expected rate of return generated by the ___________ may be compared to the investor’s required rate of return to determine whether the investor should purchase (or sell) the investment
CAPM
The _______ is a broad or macro perspective of the risk-return relationship, while the more common ______ has the versatility to be used with portfolios and individual securities.
- CML
- SML
The SML uses _______ as a risk measure, whereas the CML uses ________.
- Beta
- Std Dev
Securities with CAPM expected returns above the SML are __________ as they provide a higher expected return for the same level of risk (beta) as repre-sented on the SML
Undervalued
Securities with CAPM expected returns below the SMA are ___________ as they provide a lower expected return for the same level of risk (beta) as repre-sented on the SML
Overvalued
__________ attempts to explain return expectations in terms of multiple factors or variables. _______explains the returns on stock as a result of only one factor.
- Arbitrage pricing theory
- CAPM
This theory suggests that investors are unable to outperform the market on a consistent basis without accepting additional risk
Efficient Market Hypothesis
The basic assumption of ________ is that current stock prices reflect all available information for a company and that the prices rapidly adjust to reflect any new information
EMH
Since the market’s efficiency in valuing securities is extremely quick and accurate, investors are not able to find undervalued stocks on a consistent basis
____________ form of EMH holds that current stock prices have already incorporated all historical market data, such as prices, trading volume, and published financial information
weak form
Fundamental analysis and insider information may produce above-market returns under the _____ form of EMH
weak form
_________ form of EMH holds that the current stock price not only reflects all past historical price data but also data from analyzing financial statements, industry, or current economic outlook
semistrong
Insider information may produce superior returns under the _____ form of EMH
semistrong
This form suggests that many analysts follow the same stock and that any new information will be quickly incorporated into the current price. Thus, even fundamental analysis is not likely to yield above-market returns.
semistrong
Holds that stock prices reflect all public information and most private (insider) information. Therefore, even traders using inside information are unlikely to consistently outperform the market.
the strong form
Technical analysis, fundamental analysis, and insider information will not allow investors to achieve consistently superior performance under the ______ form
strong form
_________are unexpected market results or trends that tend to contradict the EMH.
Anomalies
The ___________ effect relates to the number of analysts that follow smaller-size companies. This neglect permits investors to find bargain-priced stocks and ultimately earn superior returns
small firm effect
The _____________ ratio effect suggests that higher returns are attainable with portfolios consisting of securities with low ratios
price-to-earnings
Options can be used to create a ______ around the value of the stock. For example, writing a call option on a stock can generate premium to pay for the premium on a put option.
Collar
This type of arrangement is generally referred to as a zero-cost collar because there is no cost to the investor; however, the option contracts will expire and the collar would have to be put back in place after expiration
